Pressures from different directions make it harder for nurseries to turn a profit, says Ruth Thomson
The National Childcare Strategy has produced a paradox: the more money the Government invests, the harder some private nurseries find it to maintain their profit margins. Just how tight the squeeze is going to be on income is beginning to emerge as nurseries around the country start budgeting for the coming financial year.
Central to the problem of trying to sustain profits is staff. The refrain of most nurseries contacted by Nursery World is that rises in staff costs are far outstripping the rate of inflation. One nursery admitted to miscalculating this year, raising fees by 4 per cent but seeing staff costs rise by over 10 per cent.
Hardest hit are the single operators, whose staff are being lured away by the chains' promise of a career structure, if not always more money. In response, they are having to increase fees sharply to offset higher recruitment costs and wage bills.
'We've got a serious problem with staff recruitment,' says Beelin Baxter, owner of ABC Nursery in Cambridge, an area with almost zero unemployment. 'We're going to have to put up the fees at twice the rate of inflation, and that's just to cover rising staff costs. I'm not going to make any more profits than I already am.'
Many chains remain bullish about their ability to expand and maintain profit margins, while others fear that it is only a matter of time before they too are hit by the full force of staff shortages, particularly of good managers and qualified staff.
'Staffing is the major budgeting problem,' says Kids Unlimited director Stewart Pickering. 'There are not enough qualified staff in the country for people to maintain ratios, and the rate of expansion is outstripping the increase in the supply of staff - we're finding people are head-hunting part-qualified modern apprentices. This is going to put serious pressure on the whole sector. As chains, we can offer career development but it's only pushing the problem into the future. It's a very, very serious problem.'
A low turnover of staff puts its own pressures on the bottom line, notes Child Base managing director Michael Thompson. 'People expect to move up each year. The longer you retain staff, the greater your maternity costs and the cost of subsidised childcare places, which we offer our staff,' he says.
To combat the recruitment crisis, operators large and small are budgeting for improved staff packages. All the single operators contacted by Nursery World said they would have to consider improved perks for their staff.
'I'm going to have to consider offering pensions or private health insurance - any perks that will encourage staff to stay,' says Beelin Baxter.
Child Base is investigating share options for its staff as part of an improved package of benefits, while Kids Unlimited will also be building on the benefits it already offers.
Training costs too will be taking priority in nursery budgets in the coming financial year, say operators. The reasons are fourfold: to improve staff retention, to enhance the skills of the poorer calibre candidates entering childcare, to continue improving standards and to prepare staff for the introduction of the new curriculum and foundation stage. Operators will also have to fund the 40 a week training allowance previously paid by the TECs (Training and Enterprise Councils).
Room for manoeuvre on staff costs and fees varies according to region. National Day Nurseries Association chief executive Rosemary Murphy fears that nurseries in less affluent areas and with limited scope to raise fees 'are going to have to carry the costs, and other improvements in the nursery will have to be put on hold.'
Nurseries in some affluent areas will find themselves equally under pressure due to almost zero unemployment levels and increased competition. One such area is Colchester.
'In a lot of polls, Colchester comes out as one of the richest towns in the country and it is being flooded with nurseries,' says Anita Huckle, who opened Orchard Barns Kindgarten there four years ago. 'All our waiting lists are already down and seven new nurseries have been approved. It's going to be very hard to maintain profit margins when there's so much competition. I shall have to think about advertising, which I haven't done since I opened and which is very costly.'
Scottish Independent Nurseries Association vice-convener for strategy Patricia McGinty believes Scottish nurseries, with the exception of those in Edinburgh, have largely escaped the recruitment pressures experienced south of the border. There is still pressure on salaries, though, due to top- slicing, with around 300 of the 1,175 annual grant being retained by local authorities to cover mainly training costs.
'The private sector will find it hard to match the salaries and conditions within local authority nurseries, but local authorities can afford them because they're not affected by top-slicing,' she says.
With staff accounting for some 80 per cent of expenditure, other budgetary pressures in the coming year pale into insignificance, for the chains at least. For the small nursery operator, however, they add to the financial insecurity.
One such example is rates, which are expected to rise by an average of 20 per cent, though one nursery in Leeds - Primley Park Moor town - has seen a 400 per cent increase (see Nursery World, February 10, page 5).
Parents exploiting the loophole in the Working Families Tax Credit compound that insecurity. All the nurseries contacted by Nursery World had experienced or heard of such cases.
And there is the uncertainty of who will provide funded places for three-year-olds. Here the divide, says Rosemary Murphy, is largely a north-south one, with Labour councils in the north traditionally providing more maintained provision than their Conservative counterparts in the south.
Nurseries in Leeds, Colchester and Cambridge all stated that their local childcare partnerships did not want three-year-olds in schools, but it is an issue that many nursery operators say they are 'keeping an eye on'.
Lesley Johnson, who runs the 50-place nursery Little Learners near Richmond, North Yorkshire, is typical of many small operators. 'My business is going well, but what concerns me are the months ahead,' she says. 'I feel apprehensive and very insecure as far the business goes.'
She has just been informed of a #3,000 increase in rates and has had four instances of parents registering for a childcare place under the Working Families Tax Credit but using it for only a day or a week, losing her income from the place for one, sometimes two, months. She too is apprehensive about who will provide places for three-year-olds.
Many small operators are already recognising that balancing the books may only be achieved by economies of scale. In response to the growing competition, Anita Huckle has formed the Colchester Childcare Connection with two other local nurseries.
'Initially, Colchester Childcare Connection was created to help us combat the threat imposed by the increasing number of chains. We decided to share the cost of training and expensive, state-of-the-art equipment. It quickly became a significant force in its own right. Our training facilities and schemes have expanded and both staff and parents feel boosted by the increasing access to wider expertise and equipment. The competition in Colchester is scary, but it has spurred us on to providing a better service.'
Beelin Baxter too is looking to a link-up with another nursery. 'One radical thing that I'm going to consider is merging. If you have under 30 places, you're unlikely to survive,' she says. 'If you have over 60 places you stand a better chance.'
It will be far from a bad financial year for all operators, however. Martin Pace of Greenhouse Childcare Consultancy explains, 'Fee levels are the main profit driver in this sector and many private nurseries, particularly those in the south-east, are able to sustain higher charges than ever before. If salaries continue to rise, nurseries operating in affluent markets will absorb the additional costs and still retain high profit margins.'
Nevertheless the recruitment crisis will remain the determining factor between profit and loss, between boom and bust for nurseries in the coming years.
Stewart Pickering says, 'It's going to drive prices up and change the marketplace over the next five years. The whole sector is going to undergo a huge shake-up.'
